Infore Environment Technology Group (SZSE:000967) May Have Issues Allocating Its Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. In light of that, when we looked at Infore Environment Technology Group (SZSE:000967) and its ROCE trend, we weren't exactly thrilled.

What Is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Infore Environment Technology Group:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.038 = CN¥828m ÷ (CN¥29b - CN¥7.5b) (Based on the trailing twelve months to March 2024).

Therefore, Infore Environment Technology Group has an ROCE of 3.8%. Ultimately, that's a low return and it under-performs the Machinery industry average of 5.6%.

See our latest analysis for Infore Environment Technology Group

Above you can see how the current ROCE for Infore Environment Technology Group compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Infore Environment Technology Group for free.

What Can We Tell From Infore Environment Technology Group's ROCE Trend?

When we looked at the ROCE trend at Infore Environment Technology Group, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 3.8% from 9.2% five years ago. However it looks like Infore Environment Technology Group might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

On a related note, Infore Environment Technology Group has decreased its current liabilities to 25% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Bottom Line On Infore Environment Technology Group's ROCE

Bringing it all together, while we're somewhat encouraged by Infore Environment Technology Group's reinvestment in its own business, we're aware that returns are shrinking. And investors appear hesitant that the trends will pick up because the stock has fallen 25% in the last five years. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

If you'd like to know about the risks facing Infore Environment Technology Group, we've discovered 1 warning sign that you should be aware of.

While Infore Environment Technology Group may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.